Cullingworth nestles in Yorkshire's wonderful South Pennines and I have the pleasure and delight to be the village's Conservative Councillor. But these are my views - on politics, food, beer and the stupidity of those who want to tell me what to think or do. And a little on mushrooms.

Sunday, 8 July 2012

Competition in banking? Now that's a radical idea...

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In that irritating way of today’s politics, the
newspapers are report on a speech that Ed Miliband will make tomorrow. And Ed
nearly gets it right for once:

The Labour
leader will call for the big five banks - Barclays, HBOS, HSBC, Lloyds TSB and
RBS/NatWest - to become seven, with privately-run "challenger banks"
to buy up to 1,000 existing branches. It is hoped that this will increase
competition and choice for consumers as well as reduce bank charges.

I say ‘nearly’ because firstly banking isn’t driven by
branches any more. For sure I have a ‘branch sort code’ but that’s pretty
virtual these days and it’s a fair while since I actually visited that branch.
And the future of banking lies in this virtual world not in grandly portico’ed
high street branches.

Secondly, I should get to choose where I bank – if Ed’s
banking reforms force me to change because they’ve forced my bank to sell its
Bradford branch to a newly formed “challenger” bank, I shall be just a tad
annoyed.

The problem with banking is that we have made it more and
more difficult to operate as a retail bank let alone start up a new one. It
didn’t use to be that way – governments passed laws that made it so:

As a result of these legislative changes, provincial
limited-liability joint-stock companies started picking off private banks.
After lengthy negotiations, three of the largest Quaker-run banking
firms--Barclays (which had become Barclays, Tritton, Ransom, Bouverie &
Company after a merger in 1888), Jonathan Backhouse & Company, and Gurneys,
Birkbeck, Barclay & Buxton, along with 17 smaller Quaker-run banks, agreed
to merge and form a bank large enough to resist takeover attempts. Barclays
took its modern form in 1896 when the 20 private banks merged to form Barclay
and Company, Ltd., a joint-stock association with deposits totalling an
impressive £26 million. This marked the beginning of Barclays' tradition of
service to farmers and fishermen.

And we have – for all sorts of reasons, good and bad –
continued to pass laws regulating the activities of banks that acted to make it
harder to start up a new bank. That made banks a special case in capitalism –
because market entry was so hard, because banks could offer free banking to
retail depositors, because banks had what we believed to be an essential
partnership with government – for all these reasons banks had no good reason to
focus on being the service businesses that they were once (and that their
advertising still claims them to be).

While the big banks were careful cautious and focused on
the day-to-day job of lending, holding deposits and such, this lack of
competition didn’t really matter much. The public got truly awful service –
banks elevated saying ‘no’ to a semi-religious status – but the banks weren’t
threatening the foundation of the economy.

But then someone discovered the money tree and introduced
bankers and governments to its wonders. By the wonders of this thing, banks and
governments – in cahoots – could shower the economy with billions in “investment”
while providing a bottomless purse of welfare, care and bacon paving. The
essential partnership between banks and government was forged anew – in exchange
for bankers making untold billions, politicians could bribe the voters with
grand projects and freebies. The politicians would keep interest rates down
(abetted as we now know by the bankers) allowing asset values to sour giving
the illusion of great wealth and on the back of this higher taxes would allow
for higher borrowing – more profit for the banks, more votes for the
politicians.

We need more competition in the pretty straightforward
job of taking my money, keeping it safe, paying it people I want it paying to
and providing (at a charge) loans should I need them. It’s not a complicated
business, there’s no reason why it can only be done by massive multi-national
corporations. Yet that is the case.

If Ed Miliband had proposed such a real change – opening up
banking licensing to the general market and allowing us to make choices about
where we keep our money – that would have been interesting. Instead we get
proposals to “break up” the banks and give us a choice of seven where there are
now five. I guess that will suit the banks. And government still has that
essential partnership with those banks. That hasn’t changed!